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Attracting top talent and retention

A detailed account of a Fastlane process...

QueenVictoria

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I was talking to a friend of mine, another entrepreneur with his own company, and we were discussing payment structure for employees. Anyhow, it's the industry standard to pay an incoming software developer who just graduated $35-45K and then train him, which retains him/her for about 3 years.

First of all, I think that salary is extremely low, and because we have an influx of talent and skilled people, we are beginning to seem like a throwback from Edwardian society in which a large segment of the population lived in poverty.

I can't imagine where in America or in the UK people can survive with that salary. So here is my plan: now bear with me because I haven't discussed this with my business partner yet- but I want to find a way to move away from the startup that just randomly fires people, and sees people as disposable talent who are there working for extremely low pay. I also dislike the kind of society we are turning into- that has no loyalty to the workplace. My father worked for a large corporation in the 80s-90s and he was basically guaranteed a job for life, and that's the way I want to run my company.

When I look back on my own history of working for various companies, I quit because I was doing the work of 3 people but not being compensated accordingly.

So how viable is it financially to retain people for 5 years if you are a start-up and pay each and every employee a starting salary of $250K?

First of all, I am aware of the odds of start-ups succeeding past the 3 year mark, and 90% of start-ups fail and lose funding, but hey, I plan to be that 10% that doesn't fold over.

So this is what I am thinking:

1. Pay each contracted full-time employee, regarding of what function they have, from CEO to graphic designer to senior software developer, a starting salary of $250K + stock options + commission. (Although the founding members will have a larger share of the stock options, and the founders can choose to pay themselves $1/year like the Google founders to avoid taxes :D)

2. Attracting top talent: Each employee will have a contract for 5 years, and at the end of 5 years, their performance will be reviewed, and they can move onto promotion/ pay upgrade or decide to leave. (This is after an initial 6 month probationary period in which they will be paid according to industry scale and be considered a "contractor". This is to weed out people who are not a fit for the company)

3. Incentives: a free onsite school for 1-6 year olds for employees to utilise- although they have to give permission to allow their children to attend as they will be given an experimental curriculum deviating away from traditional learning) The teachers of the onsite school will all have at least a M.A. degree, preferably PhD in various subjects and be paid the same as other employees. (Yes, one of my plans is to create young geniuses to be trained into working for my company as well )

So what do you think? Obviously there will be some hurdles here, but I'm not a cheap a$$, nor a start-up that thinks their employees are Chinese factory workers.

So give me some arguments pro and con this above system and some seductive arguments why people should invest in this system.
 
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NicoleMarie

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This might not help but the app Buffer has a great way of doing things. I believe we are entering a different realm of running a business and treating employees. :)

Here's some info:
http://open.bufferapp.com/introduci...nsparent-formula-and-all-individual-salaries/

Now you don't have to go as far as making everything public like buffer does, but if you do something great, let people know. ;) Buffer has had resumes thrown at them since doing this.
 

TheSilverSpoon

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Why? Do you want to run a charity? Or a business?

If the market deems a certain skill to be worth x, then why pay 5-7 times that number for the same skill and no justifiable extra benefits?
 

NicoleMarie

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Why? Do you want to run a charity? Or a business?

If the market deems a certain skill to be worth x, then why pay 5-7 times that number for the same skill and no justifiable extra benefits?

Gonna chime in here...I see what you're saying, but people already underpay. People can no longer live off minimum wage and go to college. Minimum wage is barely higher than it was when my mom was my age. We are the next generation of business; no longer can we say "ah let someone else fix that." WE are the ones that will fix that, just like Buffer and other new startups. If you treat employees more and pay them better, they'll do better for you. Remember MJ? "Give people what they want, and you'll get what YOU want." Employees=just as important as your customers. :)
 
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QueenVictoria

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Aug 27, 2014
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This might not help but the app Buffer has a great way of doing things. I believe we are entering a different realm of running a business and treating employees. :)

Here's some info:
http://open.bufferapp.com/introduci...nsparent-formula-and-all-individual-salaries/

Now you don't have to go as far as making everything public like buffer does, but if you do something great, let people know. ;) Buffer has had resumes thrown at them since doing this.

Hi NicoleMarie,

Thanks for your input. With all due respect, what is a "Happiness Hero"? I also think being one of the middlemen in social media creates no real product or value, especially in licensing content, and it is hard to justify those salaries, although they tend to be on the lower side. If we think about facebook and twitter, they have dibs on facial recognition technology and video/photo recognition technology. What does buffer.com offer that can't be an add-on feature at other social media companies?

And just because you're transparent about the fact that people are low-paid, doesn't make it a great company. (being devil's advocate here, please don't think I'm being rude)

Is 60K year really going to retain a great software developer for 5 years? My guess is NO.
 
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QueenVictoria

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Aug 27, 2014
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Why? Do you want to run a charity? Or a business?

If the market deems a certain skill to be worth x, then why pay 5-7 times that number for the same skill and no justifiable extra benefits?

To attain the top talent. If you've read what I wrote, I want to create a corporate culture of loyal employees...that bygone era where people lived on a single family income. The market currently is outsourcing most of everything. Does that mean people should be paid nothing?

What I want is to create that perfect balance between a viable revenue stream + financial security for ALL employees. I also believe that employees can be trained to do multiple things. The highest motivation is appreciation for their skill set and MONEY.
 

Ubermensch

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To attain the top talent. If you've read what I wrote, I want to create a corporate culture of loyal employees...that bygone era where people lived on a single family income. The market currently is outsourcing most of everything. Does that mean people should be paid nothing?

What I want is to create that perfect balance between a viable revenue stream + financial security for ALL employees. I also believe that employees can be trained to do multiple things. The highest motivation is appreciation for their skill set and MONEY.

Perhaps you should adopt a more fluid outlook.
 
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NicoleMarie

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Hi NicoleMarie,

Thanks for your input. With all due respect, what is a "Happiness Hero"? I also think being one of the middlemen in social media creates no real product or value, especially in licensing content, and it is hard to justify those salaries, although they tend to be on the lower side. If we think about facebook and twitter, they have dibs on facial recognition technology and video/photo recognition technology. What does buffer.com offer that can't be an add-on feature at other social media companies?

And just because you're transparent about the fact that people are low-paid, doesn't make it a great company. (being devil's advocate here, please don't think I'm being rude)

Is 60K year really going to retain a great software developer for 5 years? My guess is NO.

No problem. I think that's just what they call it haha not sure though. I agree, they're only a few years old but I think they're adding more features. I actually think they're paying pretty well considering they're a startup. Also, the $60,000 is just a base.
 

johnp

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So what do you think? Obviously there will be some hurdles here, but I'm not a cheap a$$, nor a start-up that thinks their employees are Chinese factory workers.

I think it's easy...Build a great company and you'll have no problem attracting top talent.
 

SYK

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How many people do you intend to employ?

You've listed 3 in your example so let's predicate things on that. That means you've gotta do 15k a week profit to meet payroll (excluding yours and your partner's wages, insurance and "incentives"). Is your startup making this sort of cash consistently?

And if I'm a CEO, I'm not gonna be chuffed by the idea that I get paid the same as a designer for a vastly different output. Within a company, pay needs to be commensurate to responsibility.
 
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TheSilverSpoon

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Gonna chime in here...I see what you're saying, but people already underpay. People can no longer live off minimum wage and go to college. Minimum wage is barely higher than it was when my mom was my age. We are the next generation of business; no longer can we say "ah let someone else fix that." WE are the ones that will fix that, just like Buffer and other new startups. If you treat employees more and pay them better, they'll do better for you. Remember MJ? "Give people what they want, and you'll get what YOU want." Employees=just as important as your customers. :)
Is trying to fix a macro-level problem on a micro-level an additional hurdle you really want to subject your business to?

I 100% agree with you that great employees will deserve a premium over an average employee. But a 5-7 fold increase? No way. The best employee in the world won't be able to output more work than 5-7 average employees.

To attain the top talent. If you've read what I wrote, I want to create a corporate culture of loyal employees

If your employees are staying only because they get paid insane amounts of money relative to their skill set is that truly a loyal employee?

What I want is to create that perfect balance between a viable revenue stream + financial security for ALL employees. I also believe that employees can be trained to do multiple things. The highest motivation is appreciation for their skill set and MONEY.

So let's assume that money and motivation do indeed have a strong correlation. Let's also assume that one graphic designer working for a standard salary (35-45k) puts out one unit of work per year.

You decide to hire on a graphic designer at $250k / yr. This extra money increased their motivation and work output by 100%, relative to a standard pay employee, and bumps their work output to two units per year.

Great! Right? Now you start to work out the costs and realize that you are paying $125k/yr for each unit of work. Wait a minute, that's three times as much as a normal, non-motivated employee. Sure, he's motivated and will stick around, but how will your business fair? How will it survive if your costs are multiples of what your competitors are?
 

tekcraze

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If you pay people salary far above market rate you are actually doing them a disservice. You need to connect the results to the compensation. Make it POSSIBLE to earn high salaries, but they have to earn it by driving results. I would make sure that by paying a 5-7x premium on cost means you can charge 5-7x more for your product. If you can't, then loyalty doesn't mean anything... These people you hired will soon be out of a job when your company can't compete in the market and has to close. All these overpaid (by market comparison) employees will have to learn to go back to market income levels somewhere else. Some of them will be financially destroyed by your efforts to help them.

Sent from my SGH-I337M using Tapatalk
 

Ninjakid

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Gonna chime in here...I see what you're saying, but people already underpay. People can no longer live off minimum wage and go to college. Minimum wage is barely higher than it was when my mom was my age. We are the next generation of business; no longer can we say "ah let someone else fix that." WE are the ones that will fix that, just like Buffer and other new startups. If you treat employees more and pay them better, they'll do better for you. Remember MJ? "Give people what they want, and you'll get what YOU want." Employees=just as important as your customers. :)
I couldn't agree with you more.
This is why companies like Walmart have a shit reputation. They treat their employees like garbage and pay pennies.
A company that treats employees well will have a good reputation, and loyal employees.
Have respect for your employees, because they're the ones who are carrying your business.
 
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Ninjakid

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To the OP, if finances for employees are a huge issue right now, consider taking interns
 

QueenVictoria

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I think it's easy...Build a great company and you'll have no problem attracting top talent.

These days a start-up isn't going to be able to compete with the big corporations before they know what you're up to. You'll be acquired just as things get interesting- and then they will take away all your talent by luring them with money. Talent will leave because in our technocratic era, we have learned not to have loyalties to anyone.

This is an outlook I want to change.
 

QueenVictoria

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Aug 27, 2014
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If you pay people salary far above market rate you are actually doing them a disservice. You need to connect the results to the compensation. Make it POSSIBLE to earn high salaries, but they have to earn it by driving results. I would make sure that by paying a 5-7x premium on cost means you can charge 5-7x more for your product. If you can't, then loyalty doesn't mean anything... These people you hired will soon be out of a job when your company can't compete in the market and has to close. All these overpaid (by market comparison) employees will have to learn to go back to market income levels somewhere else. Some of them will be financially destroyed by your efforts to help them.

Sent from my SGH-I337M using Tapatalk

This is the thing. Currently in the US, we have a HUGE pay disparity. A CEO will have an annual salary (let's take Yahoo!) of $4 million while a software developer will have an annual salary of $55K. By spreading the mean across all employees by decreasing the salary disparity, you have an organisation that is paid well, and people who are paid well, tend to be happier, even if that means working longer hours. This value actually in the form of ROI comes into play when you have less employee turnover, and less training time. Organisations spend upwards of $4.6 billion annually in training new hires. When you take away that initial training period by replacing it with updating skillsets, you have a well-oiled machine, a top of the line Porsche, as opposed to what is happening across all start-ups today- a dismal 90% failure rate, like a broken Toyota that is taken into the shop every week for repairs.
 
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QueenVictoria

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Is trying to fix a macro-level problem on a micro-level an additional hurdle you really want to subject your business to?

I 100% agree with you that great employees will deserve a premium over an average employee. But a 5-7 fold increase? No way. The best employee in the world won't be able to output more work than 5-7 average employees.



If your employees are staying only because they get paid insane amounts of money relative to their skill set is that truly a loyal employee?



So let's assume that money and motivation do indeed have a strong correlation. Let's also assume that one graphic designer working for a standard salary (35-45k) puts out one unit of work per year.

You decide to hire on a graphic designer at $250k / yr. This extra money increased their motivation and work output by 100%, relative to a standard pay employee, and bumps their work output to two units per year.

Great! Right? Now you start to work out the costs and realize that you are paying $125k/yr for each unit of work. Wait a minute, that's three times as much as a normal, non-motivated employee. Sure, he's motivated and will stick around, but how will your business fair? How will it survive if your costs are multiples of what your competitors are?

I think you are only looking at one employee- as opposed to looking at the entire organisation. If you read my response above to the large pay disparity between employees at companies, then spreading the mean across all employees will create more motivation and work output as a whole, not simply one employee alone. Let's say you pay a CEO $4 million/year- while you pay all your developers $50K how productive and how much revenue is that CEO going to create to justify his/her salary? If we look at case examples in past history of organisations, the organisations with the least pay disparity created a workplace ethic in which most employees were happy.

Let's take for example, Costco- where there is virtually no turnover, and employee satisfaction is high- it is because they are paid and compensated well over the market average.

Whereas, you look at the start-up space. 90% failure rate. Despite those rare successes, obviously something isn't working with these lowly paid 20-somethings with managers just randomly firing left and right when they don't meet their goals. Simple fact is, an organisation is made up primarily of busy worker bees. When these worker bees are busy looking for other jobs that pay more, they are not focused on the company objectives.
 

QueenVictoria

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How many people do you intend to employ?

You've listed 3 in your example so let's predicate things on that. That means you've gotta do 15k a week profit to meet payroll (excluding yours and your partner's wages, insurance and "incentives"). Is your startup making this sort of cash consistently?

And if I'm a CEO, I'm not gonna be chuffed by the idea that I get paid the same as a designer for a vastly different output. Within a company, pay needs to be commensurate to responsibility.

I think you're looking at this from a micro perspective as opposed to a macro perspective. Let's say a start-up has around 10-15 employees and has locked deals with large corporate clients for upwards of $15 million for 2 projects that will take 8months-2 years to execute, paying each employee $250K/ year will be perfectly within its means.

You're also thinking that CEOs somehow have greater powers than the Board of Directors and the shareholders. Unless a CEO is able to close multi-million dollar deals on a regular basis, then I don't think he/she should be paid in the millions per annum. If you look at the history of CEOs- they have a bad track record. Most of them lose money for the corporation and are finally replaced when the Board of Directors sacks him/her.
 

SYK

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I get the crux of what you're saying: treat your employees well, engender loyalty and job security, parlay this into strong company performance. However, this is simply unbridled idealism supported by rubbery, imagined financials.

All the best with this approach. Make a post in here once you've got this implemented in your company and I'll be back to commend you.
 
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tekcraze

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First of all, I am aware of the odds of start-ups succeeding past the 3 year mark, and 90% of start-ups fail and lose funding, but hey, I plan to be that 10% that doesn't fold over.
Uh oh... I don't like where you are heading. I get the idealistic concept, and totally support paying people what they are worth, but you're down the path of thinking there are millions of dollars in salary for a startup just hiring its workforce. EVERYONE plans to be the one that doesn't fail. The best way to ensure that is to not burn all your cash before you prove your business model. On the opposing side, the best way to burn all your cash is to commit to 5 year contracts overpaying anyone that walks through the door.

I don't know what stage your business is at, but I wouldn't even start thinking about implementing something like this until you have a mature and you can take the extra salary out of profits. And even then, I think people need something to drive them. Paying a high salary for just showing up denies them the chance to feel like they have really worked for it.
 

Ninjakid

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EVERYONE plans to be the one that doesn't fail. The best way to ensure that is to not burn all your cash before you prove your business model.
Exactly.

Maybe I change my stance on this a little. People who are working for a startup should understand that there's a lot of risk involved, and there are tremendous sacrifices being made to keep the company from sinking.
 

QueenVictoria

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Uh oh... I don't like where you are heading. I get the idealistic concept, and totally support paying people what they are worth, but you're down the path of thinking there are millions of dollars in salary for a startup just hiring its workforce. EVERYONE plans to be the one that doesn't fail. The best way to ensure that is to not burn all your cash before you prove your business model. On the opposing side, the best way to burn all your cash is to commit to 5 year contracts overpaying anyone that walks through the door.

I don't know what stage your business is at, but I wouldn't even start thinking about implementing something like this until you have a mature and you can take the extra salary out of profits. And even then, I think people need something to drive them. Paying a high salary for just showing up denies them the chance to feel like they have really worked for it.

A lot of startups had negative cash flow- Facebook as a prime example, until 2011. From 2005-2011, they reported losses. However, they were developing facial recognition technology, and investors put a lot of capital into it, until they launched their IPO. Another company, DeepMindTechnologies were developing a product for years, and had no known client, however investors also put a lot of money into it until they were acquired by Google last year. Tesla was also on its way to bankruptcy until the Google founders decided to inject it with a lot of capital back in 2009. After Google injected capital, IBM followed in 2010 etc.

I think you have to differentiate the startups that have no "secret sauce" akin to the thousands and hundreds and thousands of companies that have no licensing technology, who aren't developing any technology at all and simply eating up investor funds without zero client base in comparison to the companies that developing what future generations will be utilising in 10-30 years. We have this narrow myopic vision that the start-ups that "make it" is because they had a great business plan. Truth is, they didn't. They had a great vision. The start-up game is ultimately rigged by large corporations, and they are best clients you can tackle for a start-up.

So when some MBA guy tells me oh yeah, the business plan is the most important, I think he hasn't lived in the real world yet, no offense Mr. Tekcraze. :) I do think business plans are important, as long as there is a Plan B, and an exit strategy. But you do have a good point, save the 5 year employee contracts until clients are fully locked in for that contract period.

However, back to your point, I've also seen a lot of start-ups after their Series A/B start hiring like crazy, and adding 20-40 employees to their payroll when they are clearly not making any capital, and most often, producing a crappy product, like some sort of lame app while paying their employees very little while having less than 1 million users. IMHO, I can honestly say, 87% of the game companies in Silicon Valley are of this caliber and the UK might be strongly following suit.
 
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QueenVictoria

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I get the crux of what you're saying: treat your employees well, engender loyalty and job security, parlay this into strong company performance. However, this is simply unbridled idealism supported by rubbery, imagined financials.

All the best with this approach. Make a post in here once you've got this implemented in your company and I'll be back to commend you.

I'm not sure if you're aware of something called "valuation" but that is often supported by rubbery, imagined financials as you say.

Some companies have an astounding 1:800 valuation, and they still seem to be around. I think you might be surprised if you see the P/E ratios for some of your favourite companies.

Also I think if you do examine some top performing companies- you will notice they pay way over the market value. Low-ballers are low-ballers for a reason and I avoid business with them.
 

The-J

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You pay what your margins will support.

If you wanna get more complicated, you could do a discounted cash flow analysis on each possible option, like if you think a $250k/year salary will actually increase retention by a sizeable amount as opposed to paying market rates. You can't play guesswork if you're going to spend 5x the amount just because you believe people have salaries that are too low. The reason Google pays so much is because they know their numbers inside and out and they understand that by paying their employees what they do, they will reap direct benefits AND make Google seem like the coolest place to work. There will never be a shortage of talent for Google.

Also, money is not a motivator for a lot of people, especially when you're talking jumping from say 100k to 250k. It's a lot of money but you still might see high turnover. There are other variables at play when it comes to increasing retention.

There's a million books on the subject
 

QueenVictoria

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Also, money is not a motivator for a lot of people, especially when you're talking jumping from say 100k to 250k. It's a lot of money but you still might see high turnover. There are other variables at play when it comes to increasing retention.

There's a million books on the subject

You'll be surprised. In my experience, people are willing to work around the clock for 250K. The next jump is from 250K -2M which is another mentality altogether.

There is a huge difference between 100K to 250K in psychology for most employees.
 
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RogueInnovation

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The underlying premise here is that you can create a startup with employees at full salary.
You can't. Truly. Until your cashflow can support it, or make the leap to support it. Its like hitting a moving target from space with an arrow when you've never fired an arrow before.

I mean.
If you want to build to scale you should take it out of the profits, not go into such immense IMMENSE debt.
You first start with the needs of the market, then the service/product, then you make sure you have control, and then when its all tied up, you work on scale, and add money/employees. Don't skip the first steps they are very meaningful!

Build off your profits.
But even further, investigate the faults in mindset here with you jumping the gun.
You first have to get a grasp of things.


Think of it like "weaving" a quilt rather than a b c d e f g
You have to contantly reassess how all parts are connecting
If you don't then you just hear crickets no matter how much money you throw at it
 
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davedev

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So how viable is it financially to retain people for 5 years if you are a start-up and pay each and every employee a starting salary of $250K?

This doesn't sound very viable. How many employees? 3-15 or 120?

If you can support it. Sure. Experiment.

If you can't. Uh oh.

This sounds like an exercise in futility.
 

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So this is what I am thinking:

1. Pay each contracted full-time employee, regarding of what function they have, from CEO to graphic designer to senior software developer, a starting salary of $250K.

Then what's the incentive to become the CEO of your company, dealing with the most responsibilities and critical decisions to make, when the new graphic designer fresh out of college earns the same salary?

You also can't assume that your business is a bubble -- there are market forces at work, and if your competitor is offering the CEO position $800k a year while you can only afford $250k because you want to pay all your other employees the same amount as well, you're going to have a tough time hiring a competent CEO. Most of them will likely go work for your competitors who are compensating them based on what they're worth.

On the bright side, you're going to have lots of graphic designers to choose from.
 
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